PS#087: 10 Ways to Build an Investment Thesis – An Overview (Part 1)
By popular request, today we’re going to start discussing how to build investment theses.
More specifically, I’m going to discuss some of the ways I spark new ideas and new opportunities that I think are worthy of a venture investment. These are real strategies that I’ve used in my career (some have already proven successful).
Now, if you’re just tuning in, I would recommend checking out my course on How to Land a VC Internship as a starting point. This walks through all of the points and steps required to build out a fulsome investment thesis. The strategies we discuss over the next few issues will act as a starting point, but will still require building out all of the components in more detail.
Today, we’re going to set the stage for this series.
Alright, let’s get started.
The goal – building a large enough investment thesis.
As with most things, best to start with defining the goal.
The goal of this exercise is to build a large enough investment thesis that it can fit 2-3 investment opportunities within your fund.
I often see two problems for aspiring investors when it comes to thesis building…
They go so big that they can’t define any opportunities (with any confidence).
They become so niche that they miss out on other great opportunities.
At a high level, I’ve found that this goal helps rightsize your thesis building efforts. It provides some structure in a relatively unstructured industry.
Of course, the real truth is that we don’t know what we don’t know.
We don’t know where the opportunities lie within a new industry, space, technology, etc.
If we start thinking everything is an opportunity, we won’t be able to make the disciplined choices required to build a fund (remember we’re saying no to +99% of the opportunities). And, if we focus too closely on only one, we might miss the others sitting right next to it.
As you get started in your career, this will help provide some guidance and structure.
The 5 basic criteria.
OK, we’ve defined the goal. Now, it’s time to set the criteria.
In order for any of this to make sense, we need to agree on basic investment criteria.
In reality, the criteria for VC investments will differ from firm to firm due to different strategies, fund sizes, preferences, etc., but we can agree on a few basic ones to set the stage…
It aligns with the fund's mandate.
There is a “need-to-have” problem.
There is an opportunity for a better solution.
It’s possible to build a business (i.e., make money).
There is a large enough market for a venture-backed company.
From a thesis building perspective, this is a great starting point.
As you refine your thesis, you can start adding more of the nuanced criteria, such as the team, product features, competitive landscape, technology, etc. For now, we want to set the criteria wide enough so that we can find those 2-3 investment opportunities.
10 thesis building strategies.
Alright, we’ve set the stage, have the goal, and put the basic criteria in place.
Let’s outline some of the strategies I’ve used in the past.
In my mind, they fall into three categories…
Incumbents
What are the old, outdated solutions?
What are the best businesses in 10Qs and 10ks?
What can be bundled or unbundled?
Customers & Users
What are their problems?
What are their proposed solutions?
Where do they always have budget?
What are their new behaviors?
Market
What can be done now that couldn’t be done before?
What’s working in parallel industries that can be copied?
What data exists that didn’t exist before?
In the next few issues, I’m going to go in detail on how to leverage each of these strategies.
But, before we go, just a bit of a disclaimer.
These strategies are really just different ways to look at the situation. They actually represent different parts of the same process, but by using them as the prompt, they can help create new paths of exploration. Some of my best theses have come from combining several of these at the beginning to create a new perspective, a new way of looking at the situation.
